Venezuela

Glimpsing the bottom of the barrel

Lower oil prices threaten Hugo Chávez's expensive revolution. But he is not about to run out of cash soon

HE LOOKS unstoppable. Since his sweeping victory in an election in December, Venezuela's leftist president, Hugo Chávez, has stepped on the revolutionary accelerator. Parliament this week gave him the power to legislate by decree for 18 months. A committee of his supporters is drafting a constitutional reform to turn Venezuela into an avowedly socialist country, and to allow the president to stand for re-election indefinitely. “Nothing can stop the revolution!” proclaim full-page advertisements in the newspapers, adorned with the newly-minted red star of Mr Chávez's “Bolivarian socialism”. Nothing, that is, except perhaps a decline in the price of oil, on which the government depends for nearly half its revenue.

It has been Mr Chávez's extraordinary good fortune that the price of oil increased more than sixfold since he took office in 1999 to its peak last year. That has allowed him to ramp up public spending. With private investors scared off by controls and Mr Chávez's socialist talk, it is this spending binge that helped the economy recover after an opposition-led two-month general strike in 2002-03 and has since fuelled rapid economic growth (see chart).

So a lower oil price threatens economic growth, and with it Mr Chávez's popularity. Already, official projections and independent forecasts suggest the rate of growth may halve this year (but to a still-healthy 5%). Venezuelan crude, much of which is heavy and sulphurous, sells for about $10 less than lighter benchmark crudes such as Brent and West Texas Intermediate. Last year the average price for the Venezuelan “basket” of crudes was $56 a barrel. Last month, that figure was about $46. Any further fall might start to constrain Mr Chávez's ability to spend freely at home and abroad.

The 2007 budget is conservatively based on an average price for the Venezuelan basket of $29. But it is also based on average oil production of around 3.4m barrels a day (b/d). Neither of these figures bears much relation to reality and nor does the budget itself. Independent analysts, including OPEC and the International Energy Agency, believe the true production figure to be around 2.5m b/d. To complicate matters further, some of the oil is sold at a discount as part of Mr Chávez's strategy to win influence abroad, and 100,000 b/d is more or less donated to Cuba.

In contrast, total government spending last year was a third higher than originally budgeted. That pattern is likely to be repeated this year. “Quasi-fiscal” or off-budget spending, involving the diversion of oil revenues and the central bank's reserves into funds directly controlled by the president, is large and increasing.

Mr Chávez has a large piggy-bank he can draw on. The forthcoming constitutional reform is likely to strip the central bank of its last vestiges of autonomy. Between them, the bank's reserves and the resources of the National Development Fund total around $50 billion—a similar amount to this year's official budget.

So even if oil prices remain below their 2006 levels, nobody expects the bottom to fall out of the economy this year. But Mr Chávez needs not just to maintain public spending but to increase it if he is to satisfy the popular expectations he has whipped up at home, and to fulfil the pledges of aid he has made to friends abroad. In the past few weeks alone, he has promised to build 200,000 houses in Nicaragua and loan $1 billion to Ecuador, for example.

The economy is showing some signs of strain. The inflation rate, at 17% last year, was the highest in Latin America—even though Venezuela's currency is overvalued. Despite the oil bonanza, the government has run a fiscal deficit in most of Mr Chávez's time in power: this year that deficit may reach 3% of GDP.

The president seems to be aware of the problems. He has urged OPEC to cut oil output further, to set a floor for benchmark prices of $50. On January 21st he announced his intention to increase petrol prices for the first time since he came to power. Petrol costs less than 5 cents a litre in Venezuela at the official exchange rate, but raising the price is politically sensitive. The government also plans tax increases. Officials insist that plans to nationalise the telecommunications and electricity industries, announced last month, will not trigger a fall in tax revenues, though opponents doubt that.

The oil price has crept back up over the past fortnight after a sharp fall. It may well rise further. Even if it does not, few expect the benchmark price to fall to its levels of 2003, let alone 1999. But if prices stay at their levels of the past month, some economists believe that Venezuela's economy will struggle. “There's a sustainability problem,” says Luis Zambrano, an economist at the Catholic University in Caracas. “More and more spending is needed to produce a [percentage] point of economic growth.” What will lubricate the revolution when the oil bonanza ends?